Week in Review: Markets Respond Despite Mixed Signals

Growing hopes that the Federal Reserve might slow its pace of rate hikes drove markets higher, after the Bank of Canada unexpectedly hiked rates by only 0.50% instead of the expected 0.75% increase, fuelling hopes that the Fed might follow its example next week.Weak U.S. manufacturing data and disappointing earnings results from mega-cap technology companies against data showing that the U.S. economy grew faster than expected in the 3rd quarter were also key features of the week.U.S. manufacturing activity slipped into contraction territory for the first time since June 2020, after U.S. Manufacturing PMI recorded a reading of 49.90 in October (below 50 signals contraction). Services PMI also declined to 46.60, from a reading of 49.30 last month.  Meanwhile, the first estimate of gross domestic product (GDP), showed that the U.S. economy grew by 2.6% (annualised) in the 3rd quarter, ahead of expectations (2.4%). This follows the two previous quarters of negative growth. Economists point out however, that most of the growth came from rising exports.U.S. mortgage rates have more than doubled this year, crossing 7% for the first time in more than two decades. The average for a 30-year fixed-rate loan rose to 7.08% from 6.94% last week, according to Freddie Mac. House prices have also started to come under pressure, with new home sales recording a 10.9% (month-on-month) drop in September. A measure of prices in 20 large U.S. cities fell by 1.3% in August (month-on month) for a second consecutive month, the most since March 2009, according to the S&P CoreLogic Case-Shiller index.Mega-cap technology companies, including Microsoft, Amazon, Alphabet and Meta Platforms disappointed investors, following sub-par earnings releases and lowered outlooks. Amazon projected sluggish sales for the holiday quarter as the e-commerce giant contends with slower growth and consumers cutting spending in the face of economic uncertainty.Following Prime Minister Liz Truss’s resignation last week after only 45 days in office, members of the UK Parliament elected Rishi Sunak as prime minister. Sunak has appointed Jeremy Hunt as Chancellor of the Exchequer as he seeks to calm markets. Sunak and Hunt are already exploring tax hikes and spending cuts worth up to £50 billion, the FT reported.

In Europe, the ECB raised rates by 0.75% for the second consecutive time. The central bank also warned that it may raise rates further as inflation in the region is still “far to high”. Like the U.S., European and UK manufacturing and services data surprised to the downside. October data slipped into contraction territory in both economies.The Bank of Japan (BOJ) announced a ¥71.6 trillion ($490 billion) stimulus package to bolster growth and ease the impact of rising prices. At the same time, the BOJ held its key short-term interest rate unchanged at -0.1%. Inflation in Tokyo reached its fastest pace since the late 1980s, with CPI ex-fresh food rising 3.4% in October.Chinese shares saw their steepest sell-off since 2008 on Monday as investors become increasingly concerned about China’s growth outlook. Despite China reporting better than expected GDP growth of 3.9% for the 3rd quarter, authorities doubled down on its zero-Covid policy, announcing new lockdowns in several parts of China after the country reported three straight days of more than 1,000 new cases nationwide.The Dow Jones (+5.72%), S&P 500 (+3.95%) and Nasdaq (+2.24%) all ended the week higher. Similarly, the Euro Stoxx 50 (+3.92%) and FTSE 100 (+1.12%) were positive. In Asia, the Nikkei 225 (+0.80%) ended the week higher, whilst Chinese equities sold off with the Hang Seng Index (-8.56%) and Shanghai Composite Index (-4.05%) both sharply lower.

Market Moves of the Week:

Finance Minister, Enoch Gondongwana delivered South Africa’s 2022 Medium-Term Budget Policy Statement (MTBPS) this week.

Key Features from the 2022 MTBPS Speech Include:SA GDP revised down from 2.2% to 1.9%.Government is expecting to collect R1.68 trillion in tax revenue, which is R83.5 billion above the budgeted tax revenue presented in the Feb 2022 Budget, driven by higher commodity prices and a return to profitability for many large SA businesses.Government is looking to take over a significant portion of Eskom’s R400 billion debt.Spending on infrastructure such as roads, bridges, storm water systems and public buildings will increase from R66.7 billion in 2022/23 to R112.5 billion in 2025/26.Government debt is projected to peak at 71.4% of GDP in 2022/23 before moderating to 70% of GDP by 2025/26.The government’s offer on public wage negotiations was a 3% salary increase.The current social relief of distress (SRD) grant of R350 a month has been extended for one more year until March 2024. The grant currently benefits 7.4 million people at a cost of around R44 billion a year. This is over and above the existing social security grants. Currently 18.6 million South Africans receive a social grant, which is around 31% of the population.

The JSE All-Share Index ended the week up +1.29%, with strong performances from the resource (+2.29%) and financial (+5.23%) sectors. The Industrial sector (-1.29%) faced pressure as industrial heavy-weights Naspers (-15.05%) and Prosus (-14.86%) sold-off in line with their Chinese technology company counterparts, including Tencent. By Friday close, the rand was trading at similar levels to the previous week’s close, trading at R18.11 to the U.S. Dollar.

Chart of the Week:

Chinese imports of Malaysian crude oil have surged to almost 800,000 barrels a day — more than what Malaysia actually produces. The waters of Malaysia are a hot spot for ship-to-ship transfers, allowing unscrupulous traders to mix crude from other origins and rebrand it as Malaysian. The actual origin is likely from a mix of Iranian, Venezuelan and Russian crude oil.